Microsoft's announcement that it would offer online versions of SharePoint and Exchange to all its customers further validates the industry's gravitation towards Web-based applications and cloud computing. But Microsoft insists the desktop will be a viable platform for a long time.

The announcement by Microsoft Monday that it would sell online versions of its Exchange and SharePoint products to all its customers underscores the IT industry's shift towards cloud computing, where technology vendors host data on their own servers while customers access software through a Web-browser.

But as this paradigm shift occurs, the story for Microsoft — as well as its customers and partners — remains complex, especially in the face of new competitors such as Google, Amazon and Salesforce.com, who built their business models almost entirely on the Web as their main platform for development and innovation.

The majority of Microsoft customers, both in the consumer and enterprise markets, have made investments in traditional installed software such Microsoft Office, Exchange (an e-mail server) and SharePoint, a collaboration application that allows users to build shared work spaces for document sharing. Because Microsoft has made billions of dollars in annual revenue from selling this on-premise software, the cheaper cost of cloud-based applications creates a disruption to their current business model.

But Microsoft executives insisted today that the computing environment will never run fully in the cloud, contending that some applications will be hosted offsite while other capabilities on a client desktop (like Windows) will be forever necessary.

"There's always going to be a mix," Stephen Elop, president of the Microsoft Business Division, told CIO in an interview after his presentation in which he launched the product before a small group of customers, partners, press and bloggers at the St. Regis Hotel in San Francisco today. "The reality that computing will take advantage of local power, as well as cloud-based capability, is going to carry on for a long time in our estimation."

Microsoft has been pressured by the emergence of Software as a Service (SaaS) companies such as Salesforce.com and Google, who have built their business models for delivering applications almost exclusively on the Web. SaaS-based vendors, which run on a subscription model of charging customers per user per month (or year), have generally provided cheaper models for purchasing software since it doesn't require up front capital for buying servers and the staff to maintain them.

Microsoft has responded with a fairly cheap price model of its own for Exchange and SharePoint. Exchange Online can be purchased for $10 per user per month while SharePoint Online will cost just $7.25 per user per month. By comparison, under its traditional deployment model, an Exchange server costs about $699, with standard licenses for each individual costing an additional $67 each. A SharePoint server starts at more than $4,000, and goes up from there.

Under the traditional model, the trouble for companies has not just been the cost of the software and hardware. They also must pay staff to maintain the servers and the updates the software requires, a process that can be costly when more pressing business matters need technology support, a fact Elop acknowledged.

"At scale, we can provide [messaging and collaboration software] far more cost effectively than IT organizations," he says. "So now the CIO can say, 'I can pay less money to take care of that' and redirect some of these resources towards something more strategic. That's something that's happening in the business today, particularly when times are tough."

According to Elop, Microsoft has been building out their data centers and adding servers to keep up with what they believe will be a boom in cloud computing during the next few years. Unlike Google, which guards its data center strategies very closely, Elop talked pretty openly about the company's data center efforts during his presentation.

"We're adding thousands of servers every month," he says.

The key for Microsoft will be to convince the thousands of businesses who have bought from the company in the past to stay with them as this new computing model emerges. Tom Grahek, director of technology delivery at Fair Isaac, the analytics company that developed the FICO credit scoring system, has already shifted 50 of his 2,700 employees to a pilot version of Exchange Online, with the intention of moving everyone in that direction.

According to Grahek, the fact Microsoft has so many data centers ensures that his data is backed up and more secure as a result, an aspect he says makes online services from Microsoft attractive.

"Security, encryption, archiving, business continuity — it's all comes with the subscription," he says. "Taking advantage of their scale is very important to us."

As Microsoft evolves, so does its partner community of third-party companies. This ecosystem is comprised of organizations who make their living installing Microsoft software at companies and consulting them on how to use it.

During the presentation, an executive from one such partner, called ThoughtBridge, talked about this shift and admitted it had weighed heavily on some employees.

"I was a little nervous at first," says Tim Tisdale, the company's chief technology officer. "We have guys who install SharePoint. Some of the skeptics said we won't be installing SharePoint anymore."

Assuming the amount of on-premise installs decreases during the coming years, ThoughtBridge (and organizations like it) will focus more in the coming years on customizing SharePoint and designing applications on top of it to meet their customers' specific business needs.

Mentioned briefly at the launch was the future of an online Microsoft Office, the package of productivity applications such as Word, Excel and PowerPoint. Repeating a late October announcement, Elop said Office Online won't be available until late 2009.

With Google launching Google Apps back in February 2007, such a launch date of an online Office will be more than two years late to market. CIO asked Elop why the company decided to wait so long.

"We want to make sure it's in line with what our customers expect," he says. "We're held to a certain standard. If one of our competitors issues a press release that says, 'hey we have bolding or underlinining now,' that for whatever reason gets a lot of press. With Office in a cloud environment, what [customers] expect is that the user experience hangs together [with the original Office]."

Elop, while he didn't mention the company by name, most likely meant Google. But for all the rhetoric of Microsoft's software plus services strategy and how it differs from that of Google and Salesforce.com, the message from Microsoft couldn't have been more clear.

"This is full on: we're embracing this," Elop says. "I believe all great companies, when those moments come of the next generation, have to make the really hard decisions and go for it, and make that big leap forward. So I'm sure years ago, people said the Web-browser will kill Microsoft. Well, Microsoft has done well over the last few years."